Sinyard v. Commissioner

Brief Fact Summary. James Sinyard became part of a class action lawsuit against his former employer for age discrimination. He was forced to resign at the age of 49. The case settled for $35 million.

Synopsis of Rule of Law. The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed.

Facts. James Sinyard was the division manager of IDS Financial Services in Mobile, Alabama. He was allegedly forced to resign in 1987 at the age of 49. He joined two class action suits against IDS alleging age discrimination. His agreement with the law firm provided that the firm would be paid one-third of any recovery. The suits were settled in 1990 and IDS agreed to pay $35 million in settlement of all claims. The 32 plaintiffs allocated one-third to attorneys’ fees. IDS paid the attorneys’ fees directly to the law firm. The Commissioner of Internal Revenue assessed a deficiency on Sinyard claiming that the $252,608 in attorneys’ fees should be treated as income to Sinyard. The Tax Court affirmed the Commissioner.

Issue. Are the attorneys’ fees taxable income to Sinyard?

Held. Circuit Judge Noonan issued the opinion for the United States Ninth Circuit Court of Appeals in affirming the Tax Court and holding that the attorneys’ fees are taxable income.

Dissent. Circuit Judge McKeown issued a dissenting opinion arguing that the ruling is at odds with the statutory language that provides that the attorneys’ fees awarded are in addition to the plaintiff’s recovery.

Discussion. The Court of Appeals noted that it is not relevant that Sinyard never actually had possession of the money. IDS satisfied his obligation and thus he benefited. Sinyard was obligated to pay the law firm that amount of attorneys’ fees.